Period  Oct 14-Dec 14/15M14

Actual vs. Expectations  BARAKAH reported core net profit of RM26.2m for the period Oct14- Dec14 which brought 15M14 core net profit to RM88.6m. The result beat our and consensus forecasts (for a 15-months period) of RM84.2m and RM81.6m by 5%/9%, respectively.

 The variance from our forecasts is due to higher billing from precommissioning works and Pan Malaysia T&I Package A project in the last quarter.

 The 15M14 core net profit was restated by management for: (i) the one-off gain on disposal of subsidiary Vastalux Energy Bhd, (ii) one-off impairment loss on goodwill, (iii) IPO listing expenses, and (iv) bad debts written-off.

 We highlight that BARAKAH has changed its FYE to December from September effective Jan-14. Thus, our FY14 forecast is for a 15-month period from Sep-13 to Dec-14.

Dividends  No dividend was declared as expected.

Key Results Highlights  Despite revenue (for the period of Oct14-Dec14) surging by 43.0% QoQ, core net profit slid by 7.9% on the back of lower net margins (down by 4.0pts); largely attributable to the timing difference in revenue and cost recognition incurred for the T&I projects.

 The core net profit grew >100.0% YoY to RM26.2m, mainly due to: (i) the completion of several pre-commissioning job; (ii) higher billing from Pan Malaysia T&I projects that commenced in June-14 and, (iii) other on-going Onshore Engineering, Procurement, Construction and Commissioning (EPCC) projects.

 For the 15M14 period, core net profit jumped by 69.7% mainly due to the commencement of Pan Malaysia T&I project and ongoing EPCC projects as mentioned above.

Outlook  Timing difference for revenue recognition for Offshore Pan Malaysia T&I works is expected to spill over into FY15. Thus, whilst BARAKAH could still show a strong 1Q15, subsequent quarters could be impacted by contract slowdowns.

 For the Pengerang Pipeline project, pipes have been delivered in early Nov-14, hence c.40-50% earnings recognition in FY15 is expected.

 Excluding the tender book for the Arab Saudi project, we understand that BARAKAH is actively bidding for c.RM400m-RM600m worth of projects. Meanwhile, we expect c.RM150m-RM200m new wins p.a.

Change to Forecasts  We have revised our FY15 forecasts down to RM67.2m (-42.0%) as we slowdown our contract recognition for the Pan Malaysia T&I Package A project. We trim FY15E (decreased our revenue forecast by 11.9% to RM748.7m) and also lower our EBITDA margin forecasts (from blended EBITDA margin of 20.4% to 18.4%) as main turnkey contracts generally fetch lower margin compared to spot contracts.

 We introduce our FY16E earnings of RM84.0m based on assumptions of: (i) recognition from current orderbook of c.RM2.0b, (ii) RM150m new wins, and (iii) blended EBITDA margin of 18.5%.

Rating Downgrade to UNDERPERFROM (from OUTPERFORM)

 We downgrade BARAKAH to UNDERPERFORM on the back of our cautious near-term outlook.

Valuation  Post our earnings cuts, the new TP is RM0.78 (from RM1.34 previously) based on CY15 target PER of 10x.

 We ascribed a premium over other small-cap stocks (7-9x) and we believe the Pan-Malaysia contract is somewhat a security that earnings will trickle in for the coming 1-2 years.

Risks to Our Call  (i) Higher-than-expected in the Pan-Malaysia’s T&I project execution, which will increase the potential earnings being factored in our forecasts.

 (ii) Higher-than-expected margins. 

Source: Kenanga